Short-term loan industry continues to grow

Last updated: 01 July 2014

Payday loans have made
financial matters
worse for plenty of people – but that hasn't stopped the lenders from looking for new borrowers.

One of
the biggest payday loan
businesses in Australia,
UK-based Cash Converters,
is going gangbusters,
showing a profit increase
of 38% for the third
quarter of the 2014
financial year (ending in
March) compared with
the same quarter in 2013. The company had 55 stores in
Australia and had generated
$155m in revenue as of December 2013.

The good news is that the Federal Government has taken steps to protect
against this highly
predatory form of
lending. Since March
2013, payday loans of
up to $2000 that must
be repaid in 15 days or
less have been banned.
And fees are now capped
at 20% of the amount of
the loan, and interest
at four percent per
month.

The Federal Government has also
compelled payday
loan businesses to
put warnings on their
websites and list other
options for managing bills
or getting out of debt.

What are payday loans?

Short-term payday loans target people in
need of fast cash. The catch is they have to pay back the annual equivalent
of up to a staggering 742% of what they
borrowed in a combination of fees and
interest. (The new regulations have put the brakes on effective interest rates this high, but rates of around 240% are not uncommon these days.)

Repayments are generally
directly debited from the borrower's
bank account on the days that work
or pension payments are deposited.
The government's restrictions
are a step in the right direction, but payday lenders
are doing everything they can to keep the
high fees and interest rolling in. Many
payday loan businesses have simply
moved to 16-day loans, only marginally
less damaging than 15-day ones.

Are such sky-high rates legal?

The comparison rates (or the interest
rate plus other fees) on these loans is so
high because it's calculated over such a short time span. Before the new federal
rules came into effect in 2013, NSW,
Queensland and the ACT had imposed a
short-term maximum loan cost of 48%,
including interest, fees and charges, while
Victoria had imposed a 48% cap that
didn't include fees and charges (WA,
NT, and SA never set a cap).

Efforts by
Melbourne-based Consumer Action Law
Centre (CALC) and others to make a 48%
comparison rate cap the national standard
proved unsuccessful. And as for required
warnings, these were buried at the bottom
of the websites we looked
at, all but out
of sight.

Banks on board

It's also
no help
to cash-strapped
consumers
that
banks,
building
societies,
credit unions
and credit card companies are exempt
from the government ban on small-amount loans under 15 days, or that
some banks have taken an interest in the payday loan industry.

Westpac, for instance, has been
involved with Cash Converters, which acquired $60m in funding to
expand its business in 2013. Cash Converters has been the subject of a $40m class
action lawsuit in NSW based on allegedly
excessive interest charges.

More regulation needed

Payday loans have been a major focus
of CALC, which wants to see further
restrictions. In a submission to the
federal government in partnership with
the Consumer Credit Legal Centre NSW,
CALC argued that the latest payday loan
regulations could be improved with
safeguards that directly target lenders' efforts to get
around
consumer
protections.

"There
has been
a long
history
of
avoidance
strategies
employed by
fringe lenders across the credit industry," CALC said.
One such strategy involved making
borrowers pay a "subscription fee" for
a membership rewards program in
addition to other fees, a move that
recently backfired on payday lender
Cash Stop, which was forced by ASIC
to refund a total of $14,000 in such fees
to about 650 customers.

Stopping the rule-dodgers

CALC policy officer David Leermakers
told CHOICE that arming ASIC with a
new anti-avoidance provision, as the
CALC submission recommended, would
help rein in payday loan operators that
push the limits. "Payday lenders have a
habit of finding ingenious ways to dodge
the law, and they've been doing it for a
long time," he argues. "The new law is
very clear: it says 'these are the fees you're
allowed to charge', but the payday lenders
continue to step over the boundaries and
find ways to get around such restrictions
that may not be legal."

Tricky tactics

One apparent avoidance tactic that has come to CALC's attention
involves requiring a borrower to make the
first loan repayment immediately, while
paying fees and interest calculated on the
full amount of the loan. In this scenario,
a borrower seeking $500 might have to
pay back $160 immediately and walk
away with only $340 – yet they would be
charged as if they borrowed the full $500.

"The thing to understand is that the
first repayment is a ruse and this is really
just a loan for $340, but when you're a
borrower in a vulnerable position you're
unlikely to complain," Leermakers says. "So even if these kinds of avoidance
tactics are eventually stopped, many
who have already been hurt won't
be compensated."

The industry's take

Cash Converters argues payday loans
fulfil a need in Australia that would
otherwise go unmet, and that research
has shown payday loan customers don't
want to see an end to the industry. A
Cash Converters spokesperson rejected
the idea that payday loans are predatory,
and told us the company supports the
latest government regulations.

"Some
claim we prey on the vulnerable and
the desperate. This is simply untrue.
For the minority of our customers who
have few other credit options, we offer
a safe choice, in a regulated way, and
we do so with respect."

Marketing mayhem

The government may have set limits
on payday loan fees and interest, but
the tighter regulation doesn't seem to
be deterring the lenders. Payday lender
advertising is widespread – especially
on the internet – and appears to be
growing. In the UK, the Financial
Conduct Authority has clamped down
on misleading payday loan marketing
– especially ads targeting young adults.

One prominent Australian
advertiser, paid.com.au, charged a 14%
establishment fee plus four percent
monthly interest when we researched this story. So for a $500 loan paid
over four months, for example, you
would pay $650. The comparison rate for
paid.com.au amounted to an eye-opening
96.6% for a $1000 loan paid off over six
months. The rates for other prominent
advertisers are even worse.

Payday lender profiles

Sunshine Loan Centres

The marketing says "you've come to the right place if you
need between $100 and $1500 quickly", and promises to "work out a repayment
plan that fits your budget". But it would
have to be a budget that allows room for
high borrowing costs, since it charges
the maximum fees and interest allowed
by law – a 20% loan establishment fee
plus four percent interest per month.

Nimble

The lender, whose tagline is "smart little
loans", says you can "get up to $1200 paid
within 60 minutes" and adds that its "fast
cash loans only go for 16 to 50 days, so
you can't get stuck in long-term debt".
Nimble's terms would seem to defy this
logic, however, since it also charges
maximum fees and interest plus a $35
penalty for a missed repayment and an
additional $7 per day until it's paid.

While
the penalty fees for the missed payment
are accruing, the next repayment on the
schedule would still be due. Conveniently,
you can have the loans applied directly to
your Nimble Visa prepaid card.

Cash Train

Cash Train's marketing is
particularly unsubtle: "If you need a
little help getting through to your next
payday, jump on the Cash Train." It
also takes the maximum 20% of the
loan amount plus a four percent
monthly fee, and charges $38.50 for a
missed repayment.

As with competitors
Sunshine and Nimble, the government
warning about such loans, required
by the National Consumer Credit
Protection Act, is positioned at the
very bottom of the Cash Train
website, all but hidden from
prospective borrowers.

Some better alternatives

Though it may be hard to spot on payday lender websites, the government's required warning
offers sound advice to prospective
payday loan customers, along with
details they might be unaware of.

For information about other
options for managing your bills and
debts, you can ring 1800 007 007
from anywhere in Australia to talk
to a free and independent
financial counsellor.

Talk to your electricity, gas, phone
or water provider to see if you can
work out a payment plan.

If you're on government benefits,
ask if you can receive an advance
from Centrelink – phone 13 17 94.